Clear Books Must reads | November 2014

An introduction to tax for small businesses

Tax is one of the most important things to consider when starting your new

business and with so many different types, it’s easy to get confused.

Our introduction to tax will help you get started. Here’s a quick overview of the

tax basics you need to know...

Clear Books Must reads | November 2014

PAYE is a system used by HMRC to collect income

tax and national insurance from employers on

behalf of each employee.

You must deduct tax from your employees’

wages and pay it straight to HMRC each month.

Businesses are expected to report these figures to

HMRC before each payday.

The easiest way to run your payroll is by hiring

an accountant or by installing payroll software

yourself which stores all of your employees’ details

and automatically calculates what needs to be paid.

All businesses must operate PAYE regardless of

size. To register as an employer you must contact

HMRC at least two weeks before the first planned

payday.

Income tax is simply tax paid on your income.

If you’re self-employed, this includes any profits

you make.

Your yearly tax-free personal allowance of £10,000

is deducted from your profits and you are not

required to pay tax on this.

If you are self-employed you must complete a self-

assessment tax return and return it to HMRC by

31st January each year.

PAYE Tax

Income Tax

Rate Band

Basic rate 20% £0 - £32,010

Higher rate 40% £32,011 - £150,000

Additional rate 50% Over £150,000

The current rates of income tax are:

Clear Books Must reads | November 2014

This is the contribution an employee makes from

their wages to state benefits such as pension, job-

seekers allowance and bereavement benefits.

This must be paid by the employer on behalf of all

staff if the employee is:

• over 16 and

• earns more than £153 per week.

If you’re self-employed and make a profit of over

£5,885 per year you are liable to pay national

insurance.

VAT is a tax charged on most goods and services.

If your turnover is greater than £81,000 a year you must be VAT-registered. If your turnover is less than

that, you may register voluntarily. Registering for VAT means you charge VAT on the products and services

you provide and can also claim VAT back on any business supplies and services you buy yourself.

The current rates of VAT are:

National Insurance

VAT

Rate Application

20% this is the standard rate and covers most goods

5% a reduced rate is applied to items such as domestic electricity, fuel and power

0% VAT is not chargeable on items such as children’s clothes, books, and protective equipment

See the full list here (https://www.gov.uk/rates-of-vat-on-different-goods-and-services)

Clear Books Must reads | November 2014

Corporation tax is the tax charged on any profits your

business makes, but only applies if your business is a

limited company.

For the financial year beginning 1st April 2014 the rate

is 21% if your profits are above £300,000 and 20% if

your profits are below this threshold.

Circumstances where you can apply for a reduced rate

of tax include: if you make a claim for research and

development, if your company makes a profit from

patented inventions, or if you work in the creative

industries.

This tax only needs to be paid on any profits made

from selling assets such as antiques, shares and some

types of property. The full list of when this might apply,

including exceptions is here: http://www.hmrc.gov.uk/

cgt/

This tax only applies in certain cases. Limited

companies will pay corporation tax on assets sold

instead.

Corporation Tax

Capital Gains Tax

Clear Books Must reads | November 2014

For more help with tax or running your business finances, take a look at these practical resources:

HMRC

The font of all tax knowledge, HMRC has dedicated

helplines and pages for all your tax-related questions.

Go to www.hmrc.gov.uk or call 0300 200 3211 (helpline

for new employers)

Find UK Accountant

If you’re confused about any aspect of your business’s

finances, it’s well worth investing in a good accountant.

For a good local accountant visit: http://www.find-uk-

accountant.co.uk/

VAT Calculator

A quick and handy tool to help you calculate VAT

https://www.clearbooks.co.uk/resources/calculator/vat

Open Payroll

Clear Books’ payroll software can help you keep track

of all your employee payments and details: https://

www.clearbooks.co.uk/apps/payroll

Business Support Service

If you’re struggling with tax deadlines HMRC’s Business

Support Service can help: https://www.gov.uk/

difficulties-paying-hmrc

Further Resources